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Government agencies seek changes by loan servicers

State attorneys general and federal agencies outlined a proposed overhaul as part of efforts to settle disputes over mishandled mortgages and foreclosures.

March 05, 2011|By Alejandro Lazo, Los Angeles Times

Government agencies are demanding that the country's largest banks take major steps to improve the way they modify delinquent home loans and conduct foreclosures.

The state attorneys general and federal agencies outlined the proposed overhaul in a 27-page document sent to the banks as part of efforts to settle disputes over mishandled mortgages and foreclosures, Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller, said Friday.

"These are what we expect to be binding legal requirements of how they service loans and handle foreclosures," Greenwood said, predicting counterproposals from the banks. "We will negotiate and hopefully come up with a settlement that both sides will sign."

The so-called term sheet was delivered Thursday night to large providers of customer service to mortgage borrowers including Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc and Ally Financial, formerly GMAC.

The document doesn't include any financial penalty to be imposed on the banks, but the agencies may propose one later.

A state official familiar with the term sheet, who was not authorized to discuss it and so spoke on condition of anonymity, said one of its main thrusts was to make clear the processes that servicers use to decide whether to modify loans or to foreclose.

One part of the proposal sent to the banks by the coalition would force them to provide details to the newly created Consumer Financial Protection Bureau about the formulas they use to decide whether it's more advantageous for an owner of a mortgage to modify it or foreclose on it, the American Banker, a trade publication, reported.

Under a separate proposal pushed by some of the government agencies, the servicers would be required to forgive, at their own expense, $20 billion on distressed loans. The servicers have balked at that demand, saying most of the loans were sold by the original lenders to back mortgage bonds. Investors in the securities should bear the cost of any debts forgiven, the banks say.

The term sheet was signed by the attorneys general of all 50 states as well as officials of the U.S. Justice Department, the Department of Housing and Urban Development, the Federal Trade Commission and the consumer protection office.

It was not signed by federal bank regulators, including the Office of the Comptroller of the Currency.

The settlement talks grew out of probes of revelations last year that servicers had employed "robo-signers" who signed foreclosure documents without reading or understanding them.

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